with Robin Laird, Managing Director, Prosafe
Thank you for having us today! Prosafe just posted a forecast-beating operating profit for Q2 2010. How do you explain the good performance of the company, while many offshore service companies are still waiting for an amelioration of their situation, following the global financial crisis?
When you analyse our type of business, we do not operate a spot market business. The order backlog is a key performance indicator because of the long lead times between when an order/contract is placed by one of our clients, such as Statoil or Shell, up to the actual service delivery which could be 1 to 2 years later. Prosafe had already secured many contracts for 2010, ensuring that the company was already well positioned to sail through the rough time of the downturn. The harvesting of the hard work on obtaining a certain number of contracts some years ago now manifested itself in the Q2 2010 results.
Of course, like many other companies, Prosafe is not immune from what happened back in 2008. Obviously, the peak of the tendering and contracting activity cooled off in the past 12 to 18 months. That is why the current order book has decreased. Nevertheless, as the upturn is now underway, we will see these orders being replenished as the majors will be looking at new projects. Their investment plan is important because it is typically these blue chip players that Prosafe works with. Our capital equipment is substantial and therefore needs a sizeable project that sustains the economic evaluation and justify taking in one of our vessels.
Accommodation can be provided offshore in a multitude of ways. At one end of the spectrum there are the flat bottom barges which are more prevalent in this part of the world, whereas Prosafe’s vessels are more suitable for semi-harsh to harsh environments, the premium end. In between, you also have the jack-ups and monohulls. The key point here is that we now see that, certainly in the North Sea and other parts of the world such as Brazil, an increasing interest is shown in our type of vessels.
While some businesses were impacted immediately or within six months in 2008, Prosafe had the benefit of a lag effect of the contracts it still had in place. Today, we do see demand starting to grow again.
Your traditional markets are the mature offshore fields of the North Sea and the Gulf of Mexico. How do you see demand evolving in these markets and what is your strategy to extend your market leadership in the more infantile markets such as SEA, West-Africa and Brazil as you mentioned?
For the mature markets of the North Sea and the Gulf of Mexico, I think it is quite clear that the platforms and the infrastructure upon which Prosafe relies, is getting older. There are maintenance programs to be done, upgrades, modifications, etc. which make up the bread and butter of these sectors. What we see there is that the oil majors are recognizing that they require increasing their investment levels for maintenance-related projects again.
When it comes to the developing markets we tend to break these into two,; we have Brazil on one side. Brazil is a market where Prosafe will need to be present rather soon, since we do not yet operate there. Brazil is a market with such high potential with FPSOs, fixed platforms and so on, which again have been in place for quite some time. If you read some of the reports on Brazil, there is recognition that there will be new investments in this existing infrastructure. Therefore, there will be the need for the services Prosafe provides at some point in time. In particular DP vessels that can move from location to location, can actually do a program of work in this market. Brazil will happen it is more a matter of when!
To a similar but maybe lesser degree, Asia and Malaysia in particular could offer potential as well for Prosafe. However, there does need to be a mindset change. When you go to a typical operator in this part of the world, they still automatically default to an image of a flat bottom barge as the offshore accommodation solution, because this is what has typically been used in the past here. The full advantages of the semisubmersible have not been fully taken on board yet. That, plus the development into deeper water, might create the need for more work from Prosafe in this area. The Shell Philippines project at Malampaya for example has been very successful and much more satisfactory for our client than the previously used monohull solution. Prosafe gave what it said it would, which was a 100% gangway connection. In this part of the world, this is more the exception than the norm. Projects here are more economic driven while the environment also differs, with past activity mainly taking place in shallower waters.
There may be an overriding factor for all these areas following the tragedy of the Deepwater Horizon in the US Gulf. As a result, we will see stricter safety regulations offshore in terms of process, procedures and equipment used. Given that Prosafe is already positioned at the premium end of the offshore accommodation market, we know that we are well placed to meet the high standards of the industry!
We recently saw you refurbishing the Regalia for USD 190 million in order to also better adhere to these high, in this case Norwegian, standards. Will we see Prosafe increasing its fleet further, and how well is the rest of your fleet adapted to the current market needs?
In terms of our strategy over the years, I have seen a lot of changes since I first started with the company in 1995. At that time, Prosafe was owned by venture capital and had a fleet of five units. The venture capitalists were looking for cash rather than a long-term perspective and the company ended up selling 2 of its units to convert them to drilling units. The Prosafe we see today has in fact only started in 1997 when the company was floated on the Oslo Stock Exchange with only three vessels in its fleet. With most of the cash coming from its own balance sheet, Prosafe gradually acquired new vessels resulting in the fleet of 11 semisubmersibles and 1 jack-up today. Even with the 2 new semis coming in, there are only 19 vessels in the market worldwide.
At this point in time in our business model, we do not see that adding to the supply side ourselves will be the way forward. It will rather be a matter of looking at who is still in this market and pursue potential opportunities to consolidate. Of course we would like to see strong year-on-year growth, but in this industry that would not be a valid statement given the cyclical tendencies. Typically, Prosafe has been engaged in piece-meal acquisitions, purchasing one vessel at a time. In 2006, Prosafe acquired a company with 4 vessels, consisting of 3 semisubmersibles and 1 jack-up. We have been a rather steady company in terms of growth and have done so well that we have been able to become the market leader in this niche. Of course, we also do not want to push the market too much such that there is over supply and we end up having a similar situation as what happened in the drilling jack-up niche.
Three to four years ago, the entire industry was placing orders for drilling jack-ups, which is leading to an oversupply in this market. Prosafe operates in a niche market and needs to be cautious in monitoring and managing the demand and supply side. As a leader, Prosafe is in a good position to do so.
In terms of investment, the refurbishing of the Regalia was the largest investment Prosafe had made so far, vessel acquisitions left aside. This vessel was made fit for purpose to operate in the Norwegian market, where the standards are higher than elsewhere in the world. Obviously, working in Norway is very expensive and requires high-end quality solutions. When you look at the North Sea, one of Prosafe’s other vessels, the Safe Caledonia, has been planned to undergo significant upgrades as well. In 2012, this vessel will therefore be out of the market for a few months. To better serve its customers, it is important for Prosafe to continuously upgrade its fleet.
This upgrade will take place to send the Safe Caledonia into a new region?
What has to be remembered is that the modular topsides on these vessels have a limited lifespan and the Safe Caledonia itself is already around 26 years old. Rather than moving into a different market, this upgrade will lengthen the vessel’s economic lifespan. As long as there are no major cracks or problems in the hull, these vessels can last up to 50 years. Prosafe is not in this market for the short haul, justifying these large investments to better position itself for the long run.
An important challenge for the industry is obviously to adapt and prepare to address the more difficult operating areas. You already have 6 dynamically positioned rigs that allow you to better serve deepwater areas. How will you further see this industry trend affecting your business and the fleet, and how well is the company prepared to deal with this challenge?
As you move in deeper water, DP comes into its own as the traditional mooring systems become much more difficult to do. Again, this comes back to whether there is a demand for DP units. At the moment, Prosafe owns a mixed fleet of moored and DP vessels and is quite confident that it is in a good place to address the current needs of its clients. Of course, you cannot always be in the right place and the right time. Because of the internal infrastructure and the higher fuel consumption, DP units are more expensive to use for the clients, so it is better to find a balance rather than entirely switching 100% to DP. When you look at the bigger picture from a strategic perspective, there is a mixture in terms of the other players with DP and moored vessels. Everything else being equal, there might be opportunities for Prosafe to look out there as well.
In 2009 we saw rig utilization dropping by 6% compared to 2008, while so far no significant improvements have been booked for 2010. When will we see utilization rates going up again?
While utilization is one key component for us, the day rates are another one. Essentially, the results and financial performance of Prosafe are a function of these two components. There are units that can for example only operate 6 months per year but contribute strongly in the accounts because of strong day rates. At the moment, this is the case for Safe Bristolia operating in the North Sea. This will be the best performing unit this year! The best performing vessel in 2008 was Safe Concordia whereas it does not have any work this year at all. There is thus a strong variety in utilization of these vessels which can be accommodated by Prosafe’s extensive fleet. Naturally, a company owning only 1 or 2 vessels will be much more affected when a vessel cannot be deployed for a certain time.
In the future, we will likely see utilization rates staying around the 85% mark. Once again, it is also important to consider how these vessels are contracted, because while some are deployed on long term contracts, others are shorter in duration. The spot market in this context obviously still represents a timeframe of one to two years.
Furthermore, the company will typically earn great day rates in markets such as the North Sea, where significant upfront investments are required to operate. If you invest USD 190 million to comply with Norwegian standards, you expect your day rates to be much greater and achieve a good return on investment. To sum up, while utilization is important, it is more about the overall result and the order book, which is critical to Prosafe as a business.
The company manages a diverse workforce of almost 400 headcount form 17 different nationalities. How do you manage to attract and retain the right people to grow the company in the future?
Obviously, you need to look at what you can offer your employees, which is much more than financial remuneration alone. Of course this is important, but there are other aspects that matter. Most of our approximately 400 staff are based offshore and Prosafe’s advantage of having a bigger fleet is to swap people from one vessel to the other. Undoubtedly, we will see wage inflation, in particular for the drilling niche in the North Sea. While not the same, this niche is sufficiently similar to tap into the transferable skillset and attract our mariners. While we are competitive with the remuneration in our niche, we will never be able to compete with the drilling market. There again, if an individual is purely financially orientated, we have a problem. The fact that Prosafe has been able to retain its people shows that there is more in addition to the remuneration package.
People are undoubtedly the key commodity in our business. You can have fantastic equipment, but you need to retain the people with the right experience, competence, etc. to be successful at an operational level. Prosafe is very focused on retaining these people. While the company has never really struggled to man up its vessels, sometimes the preference would be to have a greater pool to pick from. Once again, this is also a matter of balancing the books, because rather than having just the right amount of crew, why not have a reserve team as well? This is nice to have, but comes at a significant cost! Moreover, having an idle team that simply sits in the office might become disgruntled and start looking for opportunities elsewhere – therefore they need to be gainfully employed.
The zero mindset attitude at Prosafe does not only imply staff safety, but also means no harm to the environment. With increasing pressure to provide environmentally sustainable solutions to the industry, how can Prosafe contribute to a greener world?
During the significant overhaul to MSV Regalia, the new engines that were installed cut down significantly on the extent of NOX emissions, a double benefit because the company was already looking to replace the vessel’s engines. Safety and environment are key to Prosafe’s outlook and it is key to the company’s processes and procedures, small and large, to mitigate any risk of spillage. Fortunately, no significant issues arose so far, because the company has the right processes and equipment in place. There is a mixture of elements that Prosafe has put in place to conduct safe and efficient operations. This mindset flows throughout the company into the smallest details such as switching off the lights, PCs, printing double-sided etc.
These elements are of course part of the core values of the company, but as I explained to the staff earlier this year, they should in fact be intuitive. Values should be in the psyche and part of the human nature! The only thing a company can really do is to reinforce a culture in place where people are continuously coached in a constructive way. None of us are perfect and sometimes it requires this team effect to perform better and be continuously aware of safety and the environment. The environment is something that is easy to talk about, but it is much more difficult to put the actions in place to carry through when the budgets are under pressure. Prosafe takes a very positive outlook in this and will keep investing in safer and more environment-friendly operations.
On a personal note, we see that you have a background in accounting and finance while you are now in the position to oversee an entire company with a strong focus on engineering. What have been the main challenges to adapt, if any?
I believe that If you are a good finance director, you are effectively a general manager at that point in time as well, because you need to know what is going on in every single layer and division of the organization. Becoming Managing Director has been a gradual progress, which is why we see many decision-makers having a finance background. The challenge for me was to create a new image to convey the message that I was not only looking after the finances, but now maintained a global overview of the business as a whole. This challenge can only be overcome by taking a greater interest in these other functions to keep on learning about the business from a holistic view.
While one of the core values is about profitability, our natural default is to think about this in terms of numbers and finance. However, profitability can manifest itself in different ways. During my career at Prosafe, I have significantly increased my value through continuous learning and ongoing experience in various fields. Overall, I enjoyed the transition towards managing director because I am a firm believer that any finance manager should have the holistic perspective of a general manager. With a background in finance rather than engineering, it has of course been a very interesting learning experience!
In five years from now, where would you want to see Prosafe?
While the growth of the company is to some extent defined by the global demand beyond our power, Prosafe envisions two key growth aspects. It will be important to grow our business from the number of units we have under our command, but there will also be a focus towards becoming an even more global player in markets such as Brazil and West Africa. Up until the year 2003, Prosafe Offshore was primarily either North Sea or Gulf of Mexico focused. The first job beyond those jurisdictions was in East-Timor, and followed by Angola, Nigeria, Sakhalin, the Philippines and Denmark, to name but a few. Nevertheless, the work done here was not very sustainable or repetitive.
Four years ago, Prosafe Offshore was also entirely based out of Aberdeen before we moved to Singapore for tax reasons. For a small organization, this was a very dramatic change. Although we perceived ourselves to have a global footprint at that time, our presence in Singapore is now enhancing our global contacts and better allows Prosafe to keep its finger on the pulse of the global oil and gas developments.
Prosafe will remain to be a unique provider of high quality solutions that allow the offshore staff to live comfortably, hence increasing their satisfaction as well as their productivity. Moreover, with increasing safety concerns today, Prosafe is an important provider of a safe haven to the offshore operation. Whenever there is an incident on the platform, all that needs to be done is quickly unmoor the accommodation vessel and lift up the gangway to transport the crew away from the danger. Following the recent Deepwater Horizon accident, it is clear that Prosafe’s high-end solutions create a comfort factor by offering a safe haven.
Today, Prosafe is well placed for the future with a quality product, a good reputation and a strong track record in the industry. These are the fundamentals to grow in the future and enter new regions as the opportunities arise.